Canada: Let the good times roll – Scotiabank

Jean-François Perrault, Chief Economist at Scotiabank, points out that according to the Canada’s Federal Fiscal 2017–18 Fall Statement, the federal government is benefitting from much stronger economic conditions than assumed in the last Budget.

Key Quotes

“The improved outlook results in a $46.6 billion windfall from fiscal year 2017–18 (FY18) to FY22. About a third of that windfall is spent through a combination of new or richer programs and tax cuts.”

“Excluding the annual $3 billion adjustment for risk, the budgetary balance improves from a final $17.8 billion deficit this fiscal year (FY17) to $9.5 billion in FY23, the end of their planning horizon. There is no indication of when the budget will be balanced. The federal net debt (accumulated deficit) continues its decline, from 31.2% of GDP this fiscal year to 28.5% of GDP by the end of the planning horizon. (With Scotiabank Economics’ slightly stronger forecast of nominal GDP, net debt by FY23 totals just $27.9% of GDP.)”

“Headline policy announcements involve the indexation of the Canada Child Benefit as of FY19, costing over $1 billion a year, a more generous Working Income Tax Benefit that raises maximum benefits and expands the qualifying income range (cost of $500 million), and the previously announced changes to private corporation and small business taxation (which cost about $600 billion at their peak in FY21). No cost is yet attributed to the announced changes in the treatment of passive income held by private corporations, but we anticipate the revenues accruing from these changes will be substantial, likely more than $1 billion a year.”

“At slightly less than $2 billion, the measures announced in the Update will provide only a very minor economic boost over the next couple of years. While it goes against Governor Poloz’s attempts to cool the economy at the margin, the Update should not have a meaningful impact on Mr. Poloz’s views on the economy or interest rates. Very limited, if any, market impact should flow from this Update.”

“While we do not anticipate the Update will influence Bank of Canada policy, the measures announced today, when implemented in 2018 and 2019, will provide some relief to lower-income and more highly indebted households. The Canada Child Benefit and Working Income Tax Benefit are means tested and target households that are likely most vulnerable to rising interest rates. Furthermore, the Canada Child Benefit has unquestionably led to stronger household spending and the changes announced today might sustain somewhat stronger consumption growth than possible absent these modifications.”